RURAL AFFAIRS: Huge cost of abolishing national wheat pool

Large, sausage-shaped storage bags dotted across the rural landscape are a sign of the disaster unfolding since the single selling-desk for wheat was abolished three years ago.

Many growers have been left to store their wheat on-farm, using huge white plastic bags holding around 250 tonnes of wheat.

This system of storage has been forced on farmers as grain-traders have cherry-picked the best wheat, leaving the main silos and other storage facilities full with the previous season’s low-quality grain that has not been sold.

On-farm storage has its hazards. Invariably some wheat is spilt on the ground attracting mice, in turn attracting foxes and feral cats. Their claws tear the plastic, exposing the wheat to moisture and insects.

On-farm grain storage bags

Rotting wheat then attracts wild pigs that tear into the wheat bags, further contaminating and degrading the wheat.

When the wheat is eventually sold at a discounted price, it’s delivered to terminals where it’s mixed in with premium wheat, contaminating and devaluing the whole stockpile.

Before deregulation, the AWB single desk was the purchaser of last resort for Australian-produced wheat when it was sold from a single national pool into world markets.

From its storage sites — that achieved consistently higher phytosanitary (i.e., plant health) standards than most farmers can achieve on their farms — AWB mixed and matched various types and grades of wheat to the quality specifications of overseas buyers, then shipped and delivered consignments on time as required by Australia’s customers.

The single desk was a clearing mechanism that gave Australian growers a premium price for wheat, whereby farmers could measure their price against that of other premium wheat-suppliers, such as Canada.

In recent times, Australian wheat has traded below the cost of corn. Corn, which is less digestible than wheat, used to trade at around two-thirds of the value of Australia’s premium wheat.

Not only has the clearing mechanism for grain been destroyed, but a single seller of quality Australian wheat onto the global market has been replaced by 30,000 farmers competing against each other to sell to grain-traders. It’s a bidding war of one against all the others down to the lowest price.

AWB also held between $1.5 billion and $3.5 billion in reserves so as to purchase all Australian grain, then sell, or forward-sell, at the right time.

It operated a sophisticated currency-hedging system that minimised the risk to farmers from fluctuations in the Australian dollar.

AWB was the largest non-financial institutional currency-trader in the southern hemisphere. It was able to do what no individual farmer can do, namely, trade currencies round-the-clock, every day of the year.

AWB used to manage the many risks that no individual farmer has the time, skills or balance sheet to manage.

Minimising risks and maximising returns to farmers provided reasonable predictability of income, allowing the banks to anticipate the borrowing capacity of farmers.

This relationship between farmers and banks was established over 60 years of operations by the AWB.

Now, with returns to farmers so much lower and less predictable, the borrowing costs for farmers are rising and the value of their farmland is falling.

The AWB — as the sole owner of export wheat and with huge financial resources and depth of organisation — was able to handle trading disputes with customers.

Now, farmers themselves, or their cooperatives, own the wheat and have to handle disputes themselves. This can be a long, costly, drawn-out process.

While a number of farmer cooperatives have been formed to collectively buy and sell wheat, they don’t have the financial depth and operational sophistication once possessed by the AWB.

Recently, two grain co-ops announced they could not make any further payments to farmers following unresolved disputes with overseas buyers.

Last year, former Minister for Agriculture, Tony Burke, attended a meeting of grain farmers in western New South Wales. They presented him with a chalkboard of the losses suffered by their industry since it was deregulated, and the national wheat pool destroyed, on his watch three years previously when Kevin Rudd was prime minister.

Conservatively, wheat farmers have lost $4 billion. Given that each dollar of product at the farm gate is typically worth $4 after transport, storage and processing, the cost to the Australian economy is at least $16 billion.

In 2008, on the eve of deregulation, the Queensland Department of Primary Industries confidently declared that international demand for high-quality wheat meant that Australia was well placed “to stay ahead of our competitors and achieve premium prices”.

In sharp contrast, the Australian Associated Press recently reported that, despite a record wheat harvest of over 27 million tonnes, “Australia has become one of the lowest-cost origins of low-protein wheat in the world, which is very competitively priced against corn in Asian markets” (AAP, February 1, 2012).